Local councils turn to the bond markets to pay for infrastructure projects

Local authorities are considering revamping the municipal bond market to
finance the road, light rail and school projects that are key to the
Government's plans for £250bn of infrastructure investment.

Councils' ability to finance schemes like road-building has been hit by the double whammy of spending cuts and a hike in the cost of borrowing from the Public Works Loan Board.Photo: Alamy

Authorities including Wandsworth, Birmingham and Guildford have got themselves credit ratings over the last two months as part of the necessary preparation for potential bond issues as other sources of finance are cut or become more expensive.

Just over half of Britain's capital expenditure last year was channelled through local government, with the authorities playing a crucial role in delivering the type of projects on which the Coalition pinned its growth agenda in last week's Autumn Statement.

However, their ability to finance schemes has been hit by the double whammy of spending cuts and a hike in the cost of borrowing from the central Public Works Loan Board (PWLB).

Just under half of local authorities' capital spending comes from grants but these are set to fall from £11.1bn in 2010-11 to £6bn in 2014-15 in real terms.

Meanwhile, the Treasury has made borrowing for councils more expensive by lifting the cost of loans from the PWLB from 0.13 to 1 percentage point above gilts.

A new report, to be issued this week by local government think-tank NLGN, argues that city councils will turn to the bond markets.

"Nearly two-thirds of the councils surveyed for new research say the PWLB rate rise will change the way they borrow, suggesting that bond issuances will come back onto the local agenda for the first time in 17 years."

Tom Symons, author of the Capital Futures report, said local councils had been particularly struck by July’s issue of £600m of bonds by the Greater London Authority to fund the Crossrail scheme.

Priced at 0.8 of a percentage point above gilts, the bonds were approximately 0.17 of a point cheaper than borrowing from the PWLB after accounting for transaction costs.

Mr Symons said the GLA still needed to raise another £2bn for Crossrail and similar bond issues could see savings of £65m.

He added: “If you are a bigger authority, like Birmingham, with billions of pounds of revenue, it makes sense to consider a municipal bond.”

He suggested the Greater Manchester Transport Authority might look at bond finance to fund the £500m required for its £1bn tram scheme not covered by a £500m European Investment Bank loan.

The report suggests smaller councils could use a “club or pooled issuance” approach, involving “the use of a vehicle which issues a bond on behalf of a number of organisations”.

The think tank is aware that municipal bond issues in America have brought some over-leveraged local governments to the brink of collapse. However, in the UK authorities are bound by the 2003 Local Finance Act to engage only in “prudential” borrowing. The clause is given teeth by giving bondholders the right to an authority’s council tax income in the event of default.

Mr Symons said: “Councils must explore a completely new landscape of financing options to survive this spending review. Issuing bonds on the capital markets could enable vital investments to be saved.”